Markets Think the FOMC is Prepared for Quantitative Easing

The FOMC has opened Pandora’s Box of currency rallies and dollar sell-offs, and I’m not talking range trade rallies. I’m talking all-out, no prisoners taken, rallies versus the dollar… Let’s go to the tape!

So… The FOMC is worried… But not worried enough to implement quantitative easing (QE) RIGHT NOW. But they opened Pandora’s Box for future QE, with a statement that went like this… “We are willing to ease monetary policy further to spur growth and support prices while refraining today from expanding its holdings of securities. The Committee will continue to monitor the economic outlook and financial developments and is prepared to PROVIDE ADDITIONAL ACCOMMODATION IF NEEDED to support the economic recovery and to return INFLATION OVER TIME to levels consistent with its mandate.”

The markets took this simply as… “The FOMC might not have expanded their holdings of securities now… But they are prepared to do so… And if they are prepared to do so, they will!” So… It was as if the FOMC actually announced the implementation of additional QE!

You should have seen the currency screens light up! At first, it was just Mexican pesos (MXN), gold and silver that weren’t rallying… But that didn’t last long, and soon all currencies were taking liberties with the dollar. It’s been some time since I last saw a move like this… Well, let’s see… The last time I saw a move like this, was the last time the FOMC announced quantitative easing… March 2009…

On a sidebar, just to show you how dedicated I am, I was in Jupiter FL at Cardinals’ Spring Training when I heard the news… I got in my car, and drove to Del Rey Beach, to the Sovereign Society Home office, to inform my publisher, the lovely, Erika Nolan, that the dollar index had fallen through its 200-day moving average, and that we should remove any dollar long ETF’s that were present on the Currency Capitalist portfolio!

OK… I know, I get a gold star… But what about now Chuck, you said yesterday that if they try to do it stealth-like, the dollar could see a bit of a rally… That was wrong, as the dollar was sold like funnel cakes at a state fair. I guess, their “stealth-like” wasn’t so “stealth-like”, eh? The markets took them as the quantitative easing central bankers that they are, and will punish the dollar for that now!

Yeah, that’s the ticket… The markets took the FOMC non-move as a “move”, which I said would be met with a huge currency rally… And it was!

And guess what else happened yesterday afternoon once the currency screens began to light up? The euro (EUR) flew through its 200-day moving average price of 1.3220… So, it’s all ON this morning, as the Asians ambushed the dollar too, and then the European session has brought even more dollar selling, brining the euro to the doorstep of 1.34!

As I look out on the currency horizon, I see the “non-euro” currencies trading with a purpose this morning… The currencies from countries that have already widened their rate differential to the US and are in line for more widening are the currencies that have made the strongest moves versus the dollar (except the euro of course, which is the off-set currency to the dollar).

Aussie dollars (AUD), kiwi (NZD), loonies (CAD), krones (NOK), reals (BRL)… These currencies already enjoy an interest rate differential to the dollar, and the markets believe, along with me, that interest rates in all of these currencies are going to go higher as we move into 2011…

The dollar? Well… The FOMC also said that interest rates would remain at “ultra lows” for an extended time… So… It makes sense for the currencies from countries that already enjoy a rate differentials to the dollar, rally stronger than other currencies, this morning!

And looky there! Gold is nearing $1,300, as it builds on a rally that has moved the shiny metal to $1,293 this morning… And don’t forget silver! Looky there! Silver is trading above $21 this morning! WOW!

So… I know you think I’m just a hootin’ and a hollerin’ this morning because of the currency rally… But that would be wrong… Folks… I’m happy for the people that listened, battened down the hatches and maybe bought more currency on the dips, because this is what they hedged their portfolio for…

But… I think the FOMC is scared… And I think the Administration is scared… The markets are certainly scared… And I am too! I’m scared of what this is all leading to… I could go to the back of the dark closet right now and bring out Chuck’s thoughts on where this is leading us, but that wouldn’t do us any good… The thing that’s more important is to make certain that you have protected your earnings, and accumulated wealth, for when those things come out of the back of the dark closet, you will see why I cried from the hilltops for years now about deficit spending.

I can hear some of you asking, “Chuck… What does deficit spending have to do with the economic malaise we are in right now?” Ahhh grasshopper… You know the song that goes, “one thing leads to another”? Well… With the government all bottled up trying to deal with financing of the deficit spending, they took their eye off the economy ball… And when they realized what was happening, it was too late! That’s the simplistic explanation, rather then going deep into the deficit spending debacle!

Well… Three of the four members of the President’s economic team have either left or are leaving soon, which leaves us with US Treasury Secretary Geithner… Shoot Rudy, in my opinion, he should have been the first one to leave, two years ago! But, he’s still here, and still walking around with the blinders on that he wore while he was President of the NY Fed, before the financial meltdown… He says that he believes in a strong dollar policy, but then turns around and bangs on China to allow their currency to strengthen versus the dollar… You can’t have a strong dollar, and allow another currency to be strong at the same time, Timmy… It just doesn’t work like that!

I guess where I was going with that at first, was not to center on Geithner, but to talk about the economic advisors leaving the administration… I think it’s akin to when David Walker, the former head of the Government Accountability Office, left his job because no one would listen to him when he said the country couldn’t keep deficit spending… He has written a book with his suggestions, and is going around the country now, trying to spread the gospel… Good luck, David… I hope you get your message across!

OK… We have a couple of items outside the US to talk about today… First is the July retail sales data for Canada, which I expect to be better than expected. Second, is a Norges Bank (Norway) meeting, which I expect nothing to come from… I do expect the Norges Bank to hike rates next month, but for now, I think they’ll keep their powder dry…

Does this sound like a country whose economy is about to collapse?

China may increase its minimum wage by more than 20% annually over the next five years, to boost domestic consumption, according to the South China Morning Post, citing Huang Mengfu, vice-chairman of the National Council of Chinese People’s Political Consultative Conference and chairman of the All-China Federation of Industry and Commerce.

Slowing down? Probably… Moderating? Probably… Collapsing? Hardly!

OK… I’m seeing just a bit of slippage as I get ready to head to the Big Finish… I’m sure the NY traders are arriving at their desks, seeing these lofty levels and taking some profits this morning, don’t you think?

Here’s something that’s on my mind about all this… It’s about time for the media to focus on the European debt crisis again, don’t you think? I mean, hasn’t that been the arrow in the US’s quiver to keep the dollar from a complete collapse? I think so… I think that we’ll see the media begin to bring the heat on the Eurozone GIIPS again, and you have to wonder why they shift like that… Hmmm could it be the government directing them?

I think so… But, that’s just Chuck and his conspiracy thoughts… Better leave him alone with those thoughts right now… HA!

Then there was this… OK… This is another Conspiracy thought by Chuck, so if you’ve grown tired of this, skip ahead to the recap… This is from The Washington Post…

Some of the nation’s largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork – an admission that may open the door for homeowners across the country to challenge foreclosure proceedings. The legal predicament compelled Ally Financial, the nation’s fourth-largest home lender, to halt evictions of homeowners in 23 states this week. Now it appears hundreds of other companies, including mortgage giants Fannie Mae and Freddie Mac, may also be affected because they use Ally to service their loans.

Hmmm… Recall that I told you months ago that Ally Financial is owned by the government… It’s the old GMAC… So… Isn’t it strange to you that Ally is now so powerful overseeing foreclosures? And… Here’s where Chuck dives in deep… Hasn’t it been a project of the government to stop foreclosures? Well, the government owns the company that processes foreclosures… Hmmm…

To recap… The FOMC is worried and running scared, folks… They talked about the need for inflation, and that rates would remain at ultra lows for an extended time, and that they would step in to provide additional accommodation (read quantitative easing) should the economy need it. The markets took this as if the FOMC actually announced QE, and the rout on the dollar was on, remained on in Asian trading, and now European trading. The euro has traded through and closed higher than its 200-day moving average, which is HUGE for the single unit, and the currencies with yield differential to the dollar are outperforming the other non-euro currencies. Gold is above $1,290 and silver above $21!!!

About Chuck Butler:

Chuck Butler is the Managing Director EverBank Global Markets. The father of the Daily Pfennig® newsletter, Chuck has a career in investment services and currencies spanning 35+ years. His tacit knowledge of the global markets along with his inventive spirit has led to the creation of many distinct and innovative currency-based products. A respected analyst of the currency market, Chuck has made frequent appearances on MarketWatch, USAToday, CNNfn, Bloomberg Television, and CNBC as well as quoted in The Wall Street Journal, US News & World Report, and The Chicago Tribune.